Here's the key focus for Tesla earnings in wake of stock slide

Shares of Tesla, down 15% for the year, have fallen around 10% after each of the company's previous three earnings reports.

Jan 24, 2024 - 00:30

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Here's the key focus for Tesla earnings in wake of stock slide

Almost unique among its Magnificent Seven peers, Tesla (TSLA) - Get Free Report has been faltering since the start of 2024. The company's stock, pushed down by ongoing price cuts in Europe and China, has retreated by roughly 15% for the year so far.

And despite the fact that 2023 saw the company's stock jump by more than 100%, Tesla shares fell more than 9% following each of the company's previous three earnings reports.

Headed into the company's Wednesday fourth-quarter earnings report and call, investor sentiment, according to managing partner of the Future Fund Gary Black, is "extremely negative."

Morgan Stanley analyst and Tesla bull Adam Jonas Monday slashed his Tesla price target to $345 from $380, saying that the electric vehicle market is currently oversupplied, something that will impact Tesla.

Despite a quarter that saw higher-than-expected deliveries, 30% year-over-year growth in EV adoption and a consistent scaling-back in EV investment by legacy competitors, Black said that the company's decision to cut prices, which reduces gross margins and earnings, is the sole reason investor sentiment is so negative headed into the report.

Black reduced his earnings per share estimates by 11% since the start of the year in line with the recent price cuts.

"We believe management will lose huge credibility if it continues to blame the price cuts as needed to combat a weak economy (which is false; 4Q GDP ~2.0%) or on higher interest costs (which can be bought down to 2-3% instead of cutting prices)," Black said. "Investors aren’t stupid."

Longtime Tesla bull and Wedbush tech analyst Dan Ives, in addition to Deepwater Management's Gene Munster, have both said that Tesla's fourth-quarter report is all about the margins, which, pushed down by ongoing price cuts, have tumbled hard throughout 2023.

Ives: It's all about margin stability

Ives wrote in a Tuesday note that, while cutting prices was the right move last year, the company is currently at a crossroads: Tesla's decision to continue slashing prices or to maintain price and margin stability for 2024 "will be a foundational move for the future of Tesla over the coming years."

The company's gross margins ex-credits in the third quarter landed at 16.3% — Ives said the Street's focus is now on attempting to gauge what those margins will look like for Tesla in 2024.

"This hits on the crux of the negative issues plaguing Tesla's stock as if more price cuts continue (we still believe the vast majority are in the rearview mirror) margins could decline further which would make it difficult for the stock to shed this black cloud in the near-term," Ives said. "The reality is EV demand globally is stalling and going through a glut of OEM supply now hitting the market which in turn has put more pressure on the leader Tesla to cut prices to catalyze demand."

Ives, who maintained his $350 price target on the stock, said that although the long-term bull thesis for Tesla revolves around disruptive technology, artificial intelligence, robotics and battery advancements, the current catalysts for the stock revolve around unit demand and price stability.

"The conference call in 3Q left investors and bulls with many questions and few answers from (CEO Elon Musk) and that uncertainty has been an overhang on the stock ever since late October," Ives said. "The line in the sand around margins must be drawn tomorrow to give investors the hittable bogeys and targets for 2024 and then start the next phase of the Tesla growth story."

Munster: Margins answer the critical Tesla investing question

Much of the investing debate around Tesla simplifies down to a simple question: Is Tesla a car company or a disruptive tech giant?

Certain investors, including Ark Invest's Cathie Wood, as well as Musk himself, have said that Tesla is an AI, robotics and energy company that happens to also be in the business of cars.

The answer to the question, though, according to Munster, has to do with margins.

Munster said in October that if margins go up, it's a tech company. If they go down, it's a typical car company.

Tesla launched its highly-anticipated Cybertruck toward the end of 2023.
Anadolu/Getty Images

Tesla's margins have been falling for months, last peaking seven quarters ago at 29%. Microsoft (MSFT) - Get Free Report reported a gross margin of 71.16% last quarter; Nvidia (NVDA) - Get Free Report expects a gross margin of 75.5% for its fourth quarter.

Munster believes the margin decline will come to a halt in Tesla's fourth-quarter report, landing slightly above the 16.3% number reported in the prior quarter. He expects margins to be stable throughout the year, improving slightly in the latter half of 2024.

"Long term, I believe Tesla will expand operating margins to 25% or greater, while I expect traditional carmakers’ margins to compress over the next 10 years as they feel the financial impact of the transition to EVs," he said.

Despite the challenges faced by the company, Munster believes Tesla will maintain its share of the EV market in 2024. Part of the reason for this is that traditional automakers have been pulling back their EV investments to preserve near-term profitability.

If EV adoption accelerates within the next few years, rather than the next few decades, he said, Tesla will be in a strong position to continue dominating the market.

"If Tesla is right, traditional carmakers are making a mistake by slowing their investment," he said. "If traditional carmakers are right, Tesla is making a mistake by over-investing in a future that will take time.

Shares of Tesla were relatively flat by midday Tuesday.

Contact Ian with AI stories via email, [email protected], or Signal 732-804-1223.

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